UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the Fiscal Year Ended December 31, 2004

OR

For the transition period from                       to                     

Commission File Number 000-31523

IXIA

26601 West Agoura Road, Calabasas, CA 91302
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (818) 871-1800

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  þ No  o

The aggregate market value of the shares of the Registrant’s Common Stock held by nonaffiliates of the Registrant as of June 30, 2004, computed by reference to the closing sales price on the Nasdaq National Market on that date, was approximately $281,242,596.

As of March 1, 2005, the number of shares of the Registrant’s Common Stock outstanding was 64,075,135.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement to be delivered to shareholders in connection with their Annual Meeting of Shareholders to be held on May 19, 2005 are incorporated by reference into Part III of this Annual Report.

IXIA

FORM 10-K

TABLE OF CONTENTS

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PART I

Item 1. Business

Overview

     We are a provider of technology and systems that allow our customers to test and measure the performance, functionality, and conformance of Internet Protocol (IP) equipment and networks, and the applications that run over them. Our solutions generate, capture, characterize, and analyze high volumes of realistic network and application traffic, exposing problems, assessing performance, and verifying conformance to industry specifications. We offer a single hardware platform with interchangeable interfaces, utilizing a single set of applications and Application Programming Interfaces (APIs) which allows our customers to create a fully integrated, easy-to-use test bed. The networks our systems analyze include Ethernet networks operating at speeds of up to 10 gigabits per second, which carry data traffic over optical fiber or electrical cable. Other networks include Packet over SONET networks operating at speeds of up to 10 gigabits per second which transmit information over high-speed optical links and Asynchronous Transfer Mode (ATM) networks, operating at speeds of up to 622 megabits per second. Our telephony test suite is used to test and verify traditional Time-Division Multiplexing (TDM) voice based networks and Voice over IP technology, devices, and systems. Our customers also use Ixia’s performance applications to test and verify web, Internet, security, and business applications.

     For the year ended December 31, 2004 we have sold to over 535 existing and new customers and our Ethernet interface cards accounted for 65.6% of our net revenues. Based on revenues, for the year ended December 31, 2004, significant customers by category included:

	•	Leading network equipment manufacturers such as Cisco Systems, Hewlett Packard, Extreme Networks, Alcatel, and Nortel Networks;
	•	Semiconductor manufacturers such as Intel, Broadcom, Texas Instruments, Motorola, and Agere;
	•	Telephony equipment manufacturers such as Ericsson, Cisco Systems, and Panasonic;
	•	Internet and network service providers such as NTT, AT&T, Verizon, Comcast, and Level 3;
	•	Enterprises such as Merrill Lynch, Ford Motor Company, Microsoft, Boeing, and Lockheed Martin; and
	•	Government departments and agencies such as Defense Information System Agency (DISA), Joint Interoperability Test Command (JITC), U.S. Army Technology Integration Center (TIC), The Pentagon, and Space and Naval Warfare Systems Command (SPAWAR).

     As service providers migrate to next generation networks and global communications become increasingly IP-based, we intend to expand our business to meet the growing demand for sophisticated network and application test solutions. Key areas of growth include 10 gigabit Ethernet, Voice over IP, security, enterprise traffic emulation, Web-based application testing, Metro Ethernet, and converged voice, video and data services to the home. We intend to maintain our focus on technology leadership, expand and further penetrate our customer base, acquire new key technology and expand our international presence.

The Increasing Need for Network and Application Testing and Measurement

     The measurement and analysis of performance, functionality, and conformance of networks, applications, and communication devices is important to the following groups:

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Equipment Manufacturers. To meet the higher standards specified by network operators and network users, equipment manufacturers who provide infrastructure equipment and systems must ensure the quality of their products during development and manufacturing and prior to shipping. Failure to

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ensure the consistent performance of their products may result in the loss of customers, increased research and development costs, customer service charges and losses resulting from the return of products.

	•	Communications Chip Manufacturers. Communications chip manufacturers require equipment to evaluate and analyze the performance of their chips during the design and development phase.
	•	Telephony Equipment Manufacturers. Telephony equipment manufacturers provide devices and infrastructure equipment and must ensure not only the quality of their products during development and manufacture, but also the conformance of their products to strict industry standards. This is critical for interoperability between various vendors’ equipment, as well as to ensure that traditional TDM based voice networks operate in conjunction with IP based technologies such as Voice over IP.
	•	Internet and Network Service Providers. Internet and network service providers seek to provide network users with the high quality network services they demand. Failure to provide satisfactory service can be costly and may result in the loss of customers. To ensure desired service levels are met, Internet and network service providers must verify the performance and conformance of network equipment during the product and systems selection process prior to deployment.
	•	Network Users. Network users such as large businesses increasingly use specialized systems in order to verify that they are receiving the level of service that they have contracted to receive from Internet and network service providers. They also increasingly use these systems to measure the performance of their own networks before new equipment or applications are deployed in the network.
	•	Government Agencies. Government departments and agencies depend on test solutions to perform qualification and pre-deployment testing of network systems, protocols, and software applications running on their networks.

Characteristics Demanded of Network and Application Test and Measurement Equipment

     As networks and network devices become increasingly more sophisticated, the need for performance, functionality, and conformance testing is becoming increasingly important. Network testing solutions must also be highly scalable and capable of generating and analyzing large amounts of data at high speeds over increasingly complex configurations. Comprehensive, integrated testing must occur throughout network design, development, production, deployment and operation stages. Because this testing and verification must take place across multiple layers of the network infrastructure and for all network protocols, network testing solutions are also required to be highly flexible and modular. This rapid evolution of complex network technologies and protocols, including next generation technologies such as 10 Gigabit Ethernet, Metro Ethernet, Voice over IP, and Video over IP has resulted in the need for an integrated, single platform solution that is easy to use with minimal training and setup.

The Ixia Solution

     We are a provider of technology and systems that allow our customers to test and measure the performance, functionality, and conformance of Internet Protocol (IP) equipment and networks, and the applications that run over them. Our solutions generate, capture, characterize, and analyze high volumes of realistic network and application traffic, exposing problems, assessing performance, and verifying conformance to industry specifications. The networks our systems analyze include Ethernet networks operating at speeds of up to 10 gigabits per second, which carry data traffic over optical fiber or electrical cable. Other networks include Packet over SONET networks operating at speeds of up to 10 gigabits per second which transmit information over high-speed optical links and Asynchronous Transfer Mode (ATM) networks, operating at speeds of up to 622 megabits per second. Our telephony test suite is used to test and verify traditional Time-Division Multiplexing (TDM) voice based networks and Voice over IP technology, devices, and systems. Our customers also use Ixia’s performance applications to test and verify web, Internet, security, and business applications. Ixia offers a single hardware platform with

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interchangeable interfaces, utilizing a single set of applications and Application Programming Interfaces (APIs) which allows our customers to create a fully integrated, easy-to-use test bed.

     Our systems provide the following key benefits to our customers:

     High Performance. Our systems generate and receive data traffic at wire speed, which is the maximum rate that data traffic can be transmitted over the network. Our systems provide accurate analysis across multiple layers of the overall network and of individual network components in real-time, that is, as the transmission is actually occurring. Our systems can be configured to either generate packets of data, to group those packets into sessions, or to generate pseudo random binary sequences.

     When configured to generate packets of data, our systems analyze each discrete packet of information, thereby allowing our customers to precisely measure the performance of their networks and individual network components. This precision allows customers to accurately measure critical quality of service parameters such as throughput, latency, loss and jitter and to check data integrity and packet sequence throughout the network, as well as to locate various network problems.

     When configured to group packets of data into meaningful sessions, or conversations between computers, our systems emulate highly complex and specialized applications such as those used to transfer electronic mail, browse the Internet and manage databases. This emulation allows our customers to accurately measure critical characteristics of their networks such as session setup rate, session tear down rate and session capacity.

     When configured to generate pseudo random bit streams, our systems analyze each individual bit to measure the bit error rate of test sequences, thereby allowing our customers to precisely measure critical physical transport characteristics of their networks. Our systems also allow users to precisely repeat complex test scenarios in order to evaluate the impact of changes made to network equipment and systems.

     Highly Scalable. Each of our interface cards provides one or more ports through which our systems generate and receive data traffic. Each physical port contains its own dedicated logic circuits, with no shared resources. Our customers can easily scale the size of their test or the amount of data traffic generated by inserting additional interface cards. By connecting multiple chassis and synchronizing up to thousands of ports to operate simultaneously, our customers can simulate large-scale networks. We believe that our systems offer our customers the highest port density and therefore the most scalable systems available. In addition, our client-server architecture allows multiple users in the same or different geographic locations to simultaneously access and operate different ports contained in the same chassis.

     Highly Customizable. Each of our current generation of interface cards includes a microprocessor for each interface port. This microprocessor uses the LINUX operating system, enabling Ixia to rapidly develop test applications and to recompile code from our partner companies or acquisitions for use on the Ixia platform. In addition, our users can run their existing software applications on their Ixia hardware, or write new software applications for it. We believe that the use of this open and well-known operating system makes it easy for our customers to customize their performance analysis systems to their specific needs.

     Single Hardware Platform. Our solution operates on a single hardware platform with interchangeable interfaces, utilizing a single set of applications and Application Programming Interfaces (APIs). This architecture offers our customers a fully integrated test bed which increases productivity and reduces training requirements. Ixia’s architecture enables the emulation of millions of network users on a single scalable platform, with a mixture of both network and application layer traffic.

     Highly Modular. Our hardware products consist of stackable and portable chassis, which, depending on the chassis model, can be configured with any mix of up to 16 of our interface cards. This modular design allows our customers to quickly and easily create complex and custom test configurations. Our systems also allow for the convenient integration of additional network technologies into existing systems through the addition of specific interface cards.

     Flexibility. Our customers can easily reconfigure our systems to address changing technologies, protocols and applications without changing system hardware or replacing interface cards. For example, a customer can

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reconfigure our systems through software changes downloaded from our website. A customer might download these changes to test new network protocols or types of equipment.

     Open Architecture. Our open architecture allows our customers to quickly integrate technologies into our unified platform. Our customers use our APIs and Software Development Kit (SDK) to centrally manage, protect, automate, and extend their customized testing methodologies.

     Ease of Automation. Our systems make it easier to create automated tests that can run unattended on nights, weekends, and holidays. We offer our customers a library of automated tests that simplify and streamline the test process. These tests are repeatable and the results are presented in a structured format for easy analysis. Ixia’s Tool Command Language (Tcl) Application Programming Interface (API) is a comprehensive programming interface to the Ixia hardware, as well as to Ixia software applications. The Tcl API enables libraries of automated tests to be quickly built with specificity to a customer’s environment. We also offer a utility that exports configurations created in Ixia’s graphical user interface (GUI) as Tcl scripts.

     Ease of Use. We have designed our systems so that users can install and operate them with minimal training and setup. Our systems are easy to use and offer our customers a wide range of readily accessible pre-designed test configurations. These tests include industry standard and application-specific tests. Users can easily configure and operate our systems to generate and analyze data traffic over any combination of interface cards or ports through our graphical user interface that features a familiar Microsoft Windows point-and-click environment. Our systems also support the commonly used Tool Command Language (Tcl) for programming, which allows users to create custom and automated testing applications tailored to meet their specific requirements.

Strategy

     Our objective is to be the industry leader in providing performance, functionality, and conformance testing solutions for IP networks and IP based services. This includes next generation technologies such as 10 gigabit Ethernet, Metro Ethernet, Voice over IP, and Video over IP. Key elements of our strategy to achieve this objective include the following:

     Continue to Expand Our Addressable Markets. We plan to further expand our addressable markets into areas of network growth, such as content-aware routing and switching, secure virtual private networks, networks that carry Voice over IP, and next-generation networking technologies. We believe that we can leverage our core competencies in high-speed transmission protocols into leadership positions as these markets expand and mature.

     Maintain Focus on Technology Leadership. We intend to continue to focus on research and development in order to maintain our technology leadership position and to offer performance analysis systems that address new and evolving network technologies. We intend to maintain an active role in industry standards committees such as the Internet Engineering Task Force and to continue our active involvement in industry forums such as the Metro Ethernet Forum. We also plan to continue to work closely with customers who are developing emerging network technologies, including Cisco Systems, Hewlett Packard, NTT, Alcatel, and Nortel Networks, as well as leading edge start-up companies, to enhance the performance and functionality of our existing systems and to design future products that specifically address our customers’ needs as they evolve.

     Expand and Further Penetrate Customer Base. We plan to strengthen and further penetrate our existing customer relationships, particularly those with network and telephony equipment manufacturers, and to pursue sales to new customers. For example, the U.S. Government, Microsoft, Merrill Lynch, and Ford Motor Company currently use our systems to verify the performance and reliability of network equipment before deployment in their networks. We believe we have the potential to increase sales to enterprise customers as they focus on optimizing their networks for use with their unique applications, as well as maximizing their return on investment from existing networks by utilizing our suite of network application verification products. We plan to strengthen our customer relationships and to expand our customer base by:

•

Continuing to develop and offer new and innovative systems that meet our existing and potential customers’ needs;

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	•	Expanding our sales and marketing efforts; and
	•	Building upon and further strengthening our reputation and brand name recognition.

     We also plan to continue our focus on customer support by maintaining and expanding the capabilities of our highly qualified and specialized internal customer engineering group. This group of technically trained professionals provides our customers with support and assistance, including assistance with their performance validation requirements and available on-site training and support.

     License and Acquire Key Technologies. We plan to continue our strategy of acquiring key technologies that expand our product offerings, address customer needs, and enhance the breadth of our evolving product portfolio. Any such acquisitions may be made in the form of partnering with industry leaders, acquiring or licensing technology assets associated with product lines, or acquiring other companies. In February 2004, we acquired all of the outstanding capital stock of G3 Nova Technology, Inc. (“G3 Nova”) which develops and sells voice and Voice over IP test tools. In December 2004, we announced the acquisition of the remaining assets and unrestricted, global rights to Chariot®, the application emulation testing product line from NetIQ, effective January 1, 2005.

     Expand International Market Presence. We plan to pursue sales in key international markets, including Europe, the Middle East and Africa and the Asia Pacific region. In order to pursue sales in these markets, we intend to continue to develop and expand our relationships with key customers and distributors. In 2004, we expanded our sales and support team in Europe, Israel, and China and plan further expansion in these areas in 2005.

Products

     Our product line is made up of network traffic generation and performance analysis systems that simulate large-scale networks and of stand-alone software applications that allow our customers to verify the functionality and conformance of their products to industry standards. Our systems consist of interchangeable interface cards which fit into a multi-slot chassis. Our chassis are metal cases that incorporate a computer, a power supply and a backplane which connects the interface cards to the chassis. The interface cards generate, receive and analyze data traffic. The software for these systems includes management software and application-specific test suites.

     The operator can utilize our analysis systems in either test labs or within networks. Our systems are operated through standard computer peripheral devices. These devices include a monitor, keyboard and mouse. The operator of our systems establishes test parameters for the performance analysis by inputting data using the keyboard and mouse. The operator observes the results of the performance analysis using the monitor and may log results to files for post-analysis or archival.

     The operator configures our systems based on the specific interfaces of the network equipment being tested. For example, if the operator wants to analyze the performance of a router with Ethernet interfaces, the operator would insert Ethernet interface cards into our system.

Chassis

     Our primary chassis, the IXIA 1600T and the IXIA 400T, are highly scalable and can be configured with any combination of our interface cards. Any mix of up to 256 IXIA 1600Ts and IXIA 400Ts can be linked together and time-synchronized to support a diverse range of complex test configurations. The IXIA 1600T is a 19-inch rack-mountable 16-slot chassis, and the IXIA 400T is a compact portable four-slot chassis.

     Our highest port density chassis, the Optixia, can be configured with Gigabit Ethernet interface cards and can be similarly linked together and time-synchronized with other chassis. The Optixia is a 19-inch rack-mountable 10-slot chassis which can support up to 240 ports of 10/100/1000 megabits per second Ethernet.

     We also offer the Ixia 250 chassis. The Ixia 250 is an integrated system offering complete laptop computer functionality, including an integrated keyboard, mouse and monitor, with slots to accommodate up to two of our interface cards and an additional built-in 10/100/1000 megabits per second Ethernet test port.

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Interface Cards

     Each one of our interface cards contains from one to twenty-four independent traffic generation and analysis ports. These ports operate at wire speed, the maximum rate that data traffic can be transmitted over the network. Each port on each interface card has a unique transmit stream engine that is used to generate either packets of information or pseudo random bit streams, and a real-time receive analysis engine capable of analyzing the packets or bit streams as they are being received. The transmit stream engine generates millions of Internet protocol data packets or continuous test sequences at wire speed that are transmitted through the network and received by the analysis engine. When data packets have been generated, the analysis engine then measures throughput, latency, loss and jitter, and checks data integrity and packet sequence on a packet-by-packet basis. When bit streams have been generated, the analysis engine measures the bit error rate of test sequences. In addition, our systems measure the effectiveness of networks in prioritizing different types of traffic. Each of our current generation interface cards also includes a microprocessor per port to generate and analyze sophisticated routing protocols, such as BGP and OSPF, as well as application traffic such as TCP/IP, HTTP and SSL.

     The following tables describe our optical and electrical interface cards. The “Physical Interface Type” column distinguishes between optical interface cards capable of transmitting data traffic over fiber optic cables and electrical interface cards capable of transmitting data over copper cables. The “Transmission Speed” column identifies the speed at which data is sent out of and received by each port on the interface cards, and the “Number of Ports per Interface Card” column identifies how many ports are contained on a single card.

Interface Cards

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System Management Software

     Our systems are managed through graphical user interfaces which allow users to configure our chassis and interface cards in order to generate and analyze traffic. Each port can be independently configured to meet specific testing requirements and results can be viewed using both tables and graphs. We also allow users to create custom and automated test applications tailored to meet their specific requirements using the commonly used Tool Command Language (Tcl) programming environment.

Application Specific Test Suites

     We have a large suite of software applications that measure and analyze the performance, conformance and functionality of networks, network equipment and applications that run on these networks. These measurements enable network equipment manufacturers, enterprises, Internet and network service providers, governments, and enterprises to evaluate the performance of their equipment during design, manufacture, and before the equipment is deployed in a network. Our application-specific test suites include the following:

     IxAccess Performance Application. Ixia’s IxAccess Performance Application offers performance and scalability analysis of Internet and network edge aggregation equipment. The IxAccess Performance Application emulates PPPoX client sessions with data traffic greatly simplifying testing by eliminating the need to configure thousands of individual clients. The IxAccess Performance Application is supported on the current generation of our Gigabit Ethernet and 10/100 megabits per second Ethernet interface cards and the ATM interface card.

     IxANVL – Automated Network Validation Library. The IxANVL test suite validates the protocol implementations and operational robustness of networking devices by determining how well a network device’s protocol implementation adheres to the specifications of a specific protocol. This stand-alone test suite provides functional tests that follow individual statements within protocol specifications to assess conformance, as well as negative tests that check how a product handles badly formatted packets or packets sent in an order other than the specified one.

     IxChariot Application. The IxChariot product family offers traffic pattern analysis and decision support tools which emulate real world application data. IxChariot offers application assessment and device testing by emulating hundreds of protocols across thousands of network endpoints as well as by providing the ability to predict the expected performance characteristics of applications running on wired and wireless networks.

     IxLoad Application. The IxLoad Performance Application offers a scalable solution to assess the performance of content-aware devices and networks. IxLoad creates real-world traffic scenarios at the TCP (Layer 4 of the OSI model) and application layers (Layer 7) by emulating clients and servers for a variety of protocols including HTTP, SSL, FTP, Mail (SMTP, POP3) and Streaming (RTP, RTSP) protocols. This test suite is supported on the current generation of our Gigabit Ethernet and 10/100 megabits per second Ethernet interface cards and the Application Load Module.

     IxRouter Application. Our IxRouter Application offers a complete system for validation of advanced routers that direct data traffic throughout the Internet and are being deployed by Internet service providers. It provides the ability to generate and receive data traffic at wire speed. The Router Tester provides an integrated mix of ATM, Packet over SONET, 10 Gigabit Ethernet, Gigabit Ethernet and 10/100 megabits per second Ethernet interfaces. Utilizing routing protocol emulation software based on IP version 4 and IP version 6 RIP, RIPng, IS-IS, OSPF, and BGP-4, as well as IP Multicast, MPLS, LDP, RSVP-TE, VPLS, Layer 2 VPNs, and Layer 3 VPNs, our tester can simulate the data traffic of millions of users to automatically configure the routing table within a single router or within a network of routers. Our system thereby provides performance and reliability testing of the router or network of routers in realistic conditions.

     IxScriptMate Application. The IxScriptMate Application is a customizable test tool to automate the performance, scalability, and functional testing of network devices. The IxScriptMate Application provides a simple-to-use Graphical User Interface to configure custom automated test scenarios and analyze test results. It offers a suite of pre-built tests based on industry standard RFCs and customer requirements. These suites include

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Benchmarking Methodology for Network Interconnect Devices (RFC-2544) Test Suite, LAN Switching Devices (RFC-2889) Test Suite, Quality of Service (QoS) Test, and the IP Multicast Test Suite. Test results are collected and presented in various formats including real-time graphs presenting test execution progress, formatted reports for detailed post-test analysis, color-coded indications of test trial pass/fail outcome, and detailed test execution logs. The IxScriptMate Application is written in the commonly used Tool Command Language (Tcl).

     IxVoice Voice/VoIP/PSTN Application. Our IxVoice Voice/VoIP/PSTN Application provides a unified VoIP and PSTN test solution. It offers scalable test libraries to addresses common Voice over IP protocols including SIP, SCCP (Skinny), H.323, MGCP as well as TDM and analog telephony services.

     IxVPN Performance Application. Ixia’s IxVPN Performance Application offers a scalable performance analysis solution for validating the performance of IPSec VPN gateways. The IxVPN Performance Application uses our Encryption Load Module (ELM) which has dedicated security processors. Each port implements a full IPSec and IKE protocol stack and can emulate thousands of Secure Gateways and clients, creating thousands of IPSec tunnels. Using multiple ports, a single Ixia test system can scale to test the large scale IPSec VPN gateways and networks.

Products in Development

     We continue to develop our IP network testing and throughout 2005 we intend to remain focused on improving our position in conformance, functional, and performance testing in the following technology areas:

	•	Gigabit Ethernet
	•	10Gigabit Ethernet
	•	Metro Ethernet
	•	ATM
	•	Layer 4 – 7
	•	MPLS
	•	Multicast
	•	IPv6
	•	Voice over IP
	•	Video over IP
	•	IPSec
	•	SSL
	•	Denial of Service
	•	Wi-Fi
	•	WiMax

     We may delay or cancel the introduction of new products to the market as a result of a number of factors, some of which are beyond our control. For more information regarding these factors, see “Business — Research and Development” on page 13 and “Risk Factors — If we are unable to successfully introduce new products to keep pace with the rapid technological changes that characterize our market, our results of operations will be significantly harmed” on page 27.

Technology

     The design of all of our systems requires a combination of sophisticated technical competencies, including design of field programmable gate arrays, or FPGAs, which are integrated circuits that can be repeatedly reprogrammed to perform different sets of functions as required. The design of all of our systems also requires high-speed digital hardware design, software engineering and optical and mechanical engineering. We have built an organization of professional staff with skills in all of these areas. The integration of these technical competencies enables us to design and manufacture performance analysis systems which are highly scalable to meet the needs of our customers.

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     Complex Logic Design. Our systems use field programmable gate arrays that are programmed by the host computer and therefore can be reconfigured for different applications. Our newest products have clock frequencies, which are the timing signals that synchronize all components within our system, of up to 344 megahertz, and logic densities, which are the number of individual switching components, or gates, of more than four million gates per chip. Our customers can download new features and enhancements from our website using a web browser that runs on our system, thereby allowing rapid updates of the system. Almost all of our logic is designed in the VHDL hardware description language, which is a unique programming language tailored to the development of logic chips. This language enables the easy migration of the hardware design to application specific integrated circuits as volumes warrant. We develop VHDL code in a modular fashion for reuse in logic design, which comprises a critical portion of our intellectual property. This reusable technology allows us to reduce the time-to-market for our new and enhanced products.

     Software Technology. We devote substantial engineering resources to the development of software technology for use in our product lines. We have developed software to control our systems, analyze data collected by our systems, and monitor, maintain and self-test our hardware and field programmable gate array subsystems. A majority of our software technology and expertise is focused on the use of object-oriented development techniques to design software subsystems that can be reused across multiple product lines. These objects are client and server independent allowing for distributed network applications. This software architecture allows all of the software tools developed for our existing products to be utilized in all of our new products with very little modification. Another important component of our software technology is our graphical user interface design. Customer experience with our test products has enabled us to design a simple yet effective method to display complex configurations in clear and concise graphical user interfaces for intuitive use by engineers.

Customers

     During the period from our incorporation in May 1997 through December 31, 2004, we have shipped our systems to over 1,000 customers, including 535 existing and new customers in 2004. No customer other than Cisco Systems accounted for more than 10% of our net revenues in 2004, 2003 or 2002. Our five largest customers collectively accounted for 44.4% of our net revenues in 2004, 40.4% of our net revenues in 2003 and 48.5% of our net revenues in 2002.

     We generally do not have long-term contracts with our customers, and they may reduce or discontinue their purchases at any time.

     Customers who purchased more than $500,000 of our products during the year ended December 31, 2004 included:

Competition

     The market for network performance measurement and analysis systems for use in the high-speed data communications industry is highly competitive, and we expect this competition to increase in the future. We currently compete with test equipment manufacturers such as Agilent Technologies, Spirent Communications and

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Anritsu. We also compete with a number of small companies which are focused on network performance measurement.

     We believe that the principal competitive factors in our market include:

	•	timeliness of new product introductions;
	•	product quality, reliability and performance;
	•	ease of installation, integration and use;
	•	breadth of product offerings and features;
	•	price and overall cost of product ownership;
	•	customer service and technical support; and
	•	company reputation and size.

     We believe that we compete favorably in the key competitive factors that impact our markets. We intend to remain competitive through ongoing research and development efforts to enhance existing systems and to develop new systems. We will also seek to expand our market presence through marketing and sales efforts. However, our market is still evolving and we may not be able to compete successfully against current or future competitors.

     We expect competition to increase significantly from existing providers of network performance measurement and analysis products and from companies that may enter our existing or future markets. These companies may develop similar or substitute solutions that may be more cost-effective or provide better performance or functionality than our systems. Also, as we broaden our product offerings, we may move into new markets in which we will have to compete against companies already established in those markets. Some of our existing and potential competitors have longer operating histories, significantly greater financial, marketing, service, support, technical and other resources, significantly greater name recognition and a larger installed base of customers than we do. In addition, many of our competitors have well established relationships with our current and potential customers and have extensive knowledge of our industry. It is possible that new competitors or alliances among competitors will emerge and rapidly acquire market share. Moreover, our competitors may consolidate with each other, or with other companies, giving them even greater capabilities with which to compete against us.

     To be successful, we must continue to respond promptly and effectively to the challenges of changing customer requirements, technological advances and competitors’ innovations. Accordingly, we cannot predict what our relative competitive position will be as the market evolves for network performance measurement and analysis systems.

Sales, Marketing and Technical Support

     Sales. Our direct sales force and manufacturers’ representatives market and sell our systems primarily in the United States and Japan. Our distributors market and sell our systems primarily outside of the United States and Japan. Our net revenues from international product shipments were $30.8 million in 2004, $25.3 million in 2003, and $14.3 million in 2002. Our direct sales force maintains close contact with our customers and provides technical support to our manufacturers’ representatives and distributors.

     Marketing. We have a number of marketing programs to support the sale and distribution of our systems and to inform existing and potential customers and our manufacturers’ representatives and distributors about the capabilities and benefits of our systems. Our marketing efforts also include promoting our business in the following ways:

•

sponsoring technical seminars that highlight our solutions;

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	•	participating in industry trade shows and technical conferences;
	•	communicating through our corporate website; and
	•	advertising in trade journals.

     Technical Support. We maintain a technically knowledgeable and responsive customer service and support staff that is critical to our development of long-term customer relationships. This highly qualified and specialized internal customer engineering group:

	•	offers our customers solutions for their performance validation needs;
	•	develops custom applications at our company headquarters;
	•	can be deployed to customer sites on short notice; and
	•	provides our customers with the training to optimally utilize our systems.

Manufacturing

     Our manufacturing operations consist primarily of materials planning and procurement, quality control, logistics, final assembly and testing and distribution. We outsource the manufacture and assembly of printed circuit board assemblies to third party contract manufacturers and assembly companies. This manufacturing process enables us to operate without substantial space and personnel dedicated to manufacturing operations. As a result, we can conserve a significant portion of the working capital and capital expenditures that may be required for other operating needs.

     We are dependent upon sole or limited source suppliers for key components and parts used in our systems, including field programmable gate arrays, chips, oscillators and optical modules. We and our contract manufacturers purchase components through purchase orders and have no guaranteed or long-term supply arrangements with our respective suppliers. In addition, the availability of many components is dependent in part on our ability and the ability of our contract manufacturers and assembly companies to provide suppliers with accurate forecasts of future requirements. Any extended interruption in the supply of any of the key components currently obtained from a sole or limited source or delay in transitioning to a replacement supplier’s product or replacement component into our systems could disrupt our operations and significantly harm our business in any given period.

     Lead times for materials and components ordered by us and by our contract manufacturers vary and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. We and our contract manufacturers acquire materials, complete standard subassemblies and assemble fully-configured systems based on sales forecasts and historical purchasing patterns. If orders do not match forecasts or substantially deviate from historical patterns, we and our contract manufacturers may have excess or inadequate inventory of materials and components.

Research and Development

     We believe that research and development is critical to our business. Our development efforts include anticipating and addressing the performance analysis needs of network equipment manufacturers, Internet and network service providers, communications chip manufacturers and network users and focusing on emerging high growth network technologies.

     Our future success depends on our ability to continue to enhance our existing products and to develop products that address the needs of our customers. We closely monitor changing customer needs by communicating

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and working directly with our customers and distributors. We also receive input from active participation in industry groups responsible for establishing technical standards.

     Development schedules for technology products are inherently difficult to predict, and we cannot be certain that we will introduce any proposed new products in a timely fashion. Also, we cannot be certain that our product development efforts will result in commercially successful products or that our products will not contain software errors or other performance problems or be rendered obsolete by changing technology or new product announcements by other companies.

     We plan to continue to make significant investments in research and development. Our research and development expenses were $25.0 million in 2004, $22.0 million in 2003 and $20.4 million in 2002. These costs included stock-based compensation expense of $271,000 in 2004, $1.3 million in 2003 and $2.9 million in 2002.

Intellectual Property and Proprietary Rights

     Our success and ability to compete is dependent in part upon our ability to protect and maintain our proprietary rights to our intellectual property. We currently rely on a combination of patent, trademark, trade secret and copyright laws and restrictions on disclosure to establish and protect our intellectual property. We have one U.S. patent and have filed applications for a number of other patents in the U.S., Japan and the European Union. We cannot be certain that those applications will result in the issuance of any patents, or that any such patents, if they are issued, or our existing patent will be upheld. We also cannot be certain that such patents, if issued, and our existing patent will be effective in protecting our proprietary technology. We have registered our Ixia name, the Ixia logo and certain other trademarks in the United States and in the European Union, and have filed for registration of additional trademarks.

     We generally enter into confidentiality agreements with our officers, employees and consultants. We also generally limit access to and distribution of our source code and further limit the disclosure and use of other proprietary information. However, these measures provide only limited protection of our intellectual property rights. In addition, we may not have signed agreements containing adequate protective provisions in every case, and the contractual provisions that are in place may not provide us with adequate protection in all circumstances. Further, we have not included copyright notices on all of our copyrightable intellectual property.

     Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use technology that we regard as proprietary. We cannot be certain that the steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are similar or superior to our technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of competitive advantage and decreased revenues. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources and could significantly harm our business.

     The telecommunication and data communications industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business. We have not conducted a search to determine whether the technology we have in our products infringes or misappropriates intellectual property held by third parties. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which could relate to our products. Any claims asserting that our systems infringe or may infringe proprietary rights of third parties, if determined adversely to us, could significantly harm our business.

Employees

     As of December 31, 2004, we had 403 full-time employees. We also from time to time hire temporary and part-time employees and independent contractors. Our future performance depends, to a significant degree, on our

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continued ability to attract and retain highly skilled and qualified technical, sales and marketing and senior management personnel. Our employees are not represented by any labor unions. We consider our relations with our employees to be good.

Available Information

     Our website address is www.ixiacom.com. We make available free of charge through a link provided at such website our Forms 10-K, 10-Q and 8-K as well as any amendments thereto. Such reports are available as soon as reasonably practicable after they are filed with the Securities and Exchange Commission.

Business Risk Factors

     The statements that are not historical facts contained in the above “Business” discussion in this Item 1 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and reflect the current belief, expectations or intent of the Company’s management. These statements are subject to and involve certain risks and uncertainties. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors” in Item 7 of this Annual Report on Form 10-K.

Item 2. Properties

     Our corporate headquarters are located in Calabasas, California, where we currently lease approximately 71,600 square feet of space which houses our research and development, sales and marketing, finance and administration and manufacturing operations. The lease expires in May 2008, if not renewed. We also lease office space for our sales offices in Santa Clara, California, North Carolina, the United Kingdom, Japan and China. Additionally, we have a facility in Bucharest, Romania used primarily for research and development activities. We believe that our current facilities will be adequate to meet our needs for at least the next 12 months, and that we will be able to obtain additional space when and as needed on acceptable terms.

Item 3. Legal Proceedings

     From time to time, certain legal actions may arise in the ordinary course of the Company’s business. To date, such legal actions have not had a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of the Company’s security holders during the fourth quarter of 2004.

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Registered Securities

     (a) Market Price, Dividends and Related Matters

     Ixia’s common stock is traded on the Nasdaq National Market under the symbol “XXIA.” The following table sets forth the high and low closing sales prices of our common stock as reported on the Nasdaq National Market for the following time periods.

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     On March 1, 2005 the closing sales price reported for our common stock was $18.55 per share, and as of that date there were approximately 44 shareholders of record.

     We have never declared or paid cash dividends on our common stock and do not anticipate paying any dividends in the foreseeable future.

     (b) Use of Proceeds

     None.

     (c) Issuer Repurchases of Equity Securities

     No securities were repurchased by the Company during any month during the fourth quarter of 2004.

Item 6. Selected Financial Data

     The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those consolidated financial statements. The consolidated statement of income data set forth below for the years ended December 31, 2004, 2003 and 2002 and the consolidated balance sheet data as of December 31, 2004 and 2003 are derived from, and are qualified in their entirety by reference to, the Company’s audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of in